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We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. We have demonstrated that our organization, utilizing our boron chemistry platform, is highly productive and efficient at creating novel clinical product candidates. We have discovered, synthesized and developed five molecules that are currently in clinical development, and we believe that our organization and boron chemistry platform have the potential to continue to yield clinical candidates at a similar pace and efficiency in the future. While drug development is often uncertain and occasionally uneven, our current portfolio of product candidates and our ability to efficiently fill our own pipeline provide us with a unique opportunity to create a valuable and sustainable biopharmaceutical company.

We believe that our expertise in boron chemistry enables us to identify compounds that interact with known drug targets in novel ways and also inhibit drug targets that have been historically difficult to inhibit with traditional chemistry. We have applied this expertise across a range of fungal, inflammatory, bacterial and parasitic diseases that represent significant unmet medical needs. We have discovered and advanced into clinical development multiple differentiated product candidates that we believe have significant disease-modifying potential and attractive pharmaceutical properties. We believe that our product candidates may offer significant improvements over the standard of care for diseases that represent large, well-defined commercial opportunities.

The productivity of our internal discovery capability has enabled us to generate a pipeline of both topical and systemic boron-based compounds. We currently have five product candidates in clinical development. Our three lead product candidates include two topically administered dermatologic compoundsâAN2690, an antifungal for the treatment of onychomycosis, and AN2728, an anti-inflammatory for the treatment of psoriasis and atopic dermatitis, as well as a systemic antibiotic for the treatment of infections caused by Gram-negative bacteriaâGSK2251052, or GSK '052 (formerly referred to as AN3365). In addition, we are developing AN2718 as a topical antifungal product candidate for the treatment of onychomycosis and skin fungal infections and AN2898 as a topical anti-inflammatory product candidate for the treatment of psoriasis and atopic dermatitis.

We have entered into and are seeking partnerships to expand the therapeutic application and commercial value of our boron chemistry platform. In October 2007, we entered into a research and development collaboration, option and license agreement with GlaxoSmithKline LLC, or GSK, for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. In July 2010, GSK exercised its option to license GSK '052, and we are actively conducting research to discover additional systemic anti-infectives with GSK. In August 2010, we entered into a collaboration with Eli Lilly and Company, or Lilly, under which we are collaborating to discover products for a variety of animal health applications. In February 2011, we entered into a research and development option and license agreement with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop compounds directed against a target for the potential treatment of acne. In addition, we are applying our boron chemistry platform to the development of treatments for various neglected diseases in collaboration with leading not-for-profit organizations, including the Drugs for Neglected Diseases initiative, Medicines for Malaria Ventures, Sandler Center for Basic Research in Parasitic Diseases and the Institute for OneWorld Health.

Our Clinical Pipeline

AN2690 is our lead topical antifungal product candidate for the treatment of onychomycosis, a fungal infection of the nail and nail bed. Onychomycosis affects approximately 35 million people in the United States, and new prescriptions to treat this disease continue to grow. Lamisil (terbinafine), a systemic drug approved for onychomycosis, had worldwide peak sales of $1.2 billion in 2004, before generic entry. According to IMS Health, for the 12-month period ending June 30, 2010, 1.4 million new prescriptions were filled in the United States for both branded and generic versions of terbinafine. Despite its high labeled efficacy (38%), we believe the usage of branded and generic terbinafine has been limited due to safety concerns related to liver toxicity. The leading topical drug for onychomycosis, Penlac Nail Lacquer (ciclopirox), had U.S. sales of $125.0 million in 2002, before generic entry. According to IMS Health, for the 12-month period ending June 30, 2010, over 350,000 new prescriptions were filled in the United States for branded or generic ciclopirox. While ciclopirox has been shown to be safe due in part to its topical administration, we believe the usage of branded and generic ciclopirox has been limited due to its low labeled efficacy (5.5%-8.5%).

We believe AN2690 can potentially offer significant improvements over the standards of care for onychomycosis by combining the safety of a topical drug with significant efficacy. Due to its unique boron chemistry, AN2690 has demonstrated enhanced nail penetration properties, a novel mechanism of action with potent antifungal activity and, due in part to its topical administration, no observed systemic side effects in human dosing. AN2690 inhibits an essential fungal enzyme, leucyl-transfer RNA synthetase, or LeuRS, required for protein synthesis. The inhibition of protein synthesis leads to termination of cell growth and cell death, eliminating the fungal infection. We reported positive results from three Phase 2 clinical trials and held an end-of-Phase 2 meeting with the United States Food and Drug Administration, or FDA. In August 2010, we filed a Special Protocol Assessment, or SPA, request with the FDA in order to reach agreement on key endpoint measures and trial design to be used in our first of two identical planned Phase 3 clinical trials of AN2690. We have received the FDA's agreement on what we believe are the major parameters associated with the design and conduct of our first Phase 3 trial for AN2690. We initiated the Phase 3 clinical trial in onychomycosis in the fourth quarter of 2010. We are currently enrolling patients at clinical sites in the United States and also plan to enroll patients at clinical sites in Canada and Mexico in 2011.

AN2728 is our lead topical anti-inflammatory product candidate for the treatment of psoriasis, a chronic inflammatory skin disease that affects approximately 7.5 million people in the United States and over 100 million people worldwide. Approximately 80% of psoriasis patients have mild-to-moderate disease, which is mainly treated with topical corticosteroids and vitamin D analogs. However, topical corticosteroids and vitamin D analogs are limited in their use by patients due to their long-term safety and/or their tolerability profile. In spite of these limitations, according to IMS Health, approximately 3.9 million prescriptions were filled for these topical therapies to treat psoriasis in the United States in 2009.

We believe that AN2728 has the potential to be an effective psoriasis treatment with an attractive safety profile in a topical application, and thus provide an alternative to treatment with topical corticosteroids and vitamin D analogs. Due to its boron-based structure, AN2728 binds with the active site of the enzyme phosphodiesterase-4 (PDE4) in a novel manner, thus inhibiting its activity. This mechanism subsequently reduces the production of TNF-alpha, IL-12, IL-23 and other pro-inflammatory cytokines that are precursors of the inflammation associated with psoriasis. In June 2010, we successfully completed a Phase 2b dose-ranging trial to evaluate the safety and efficacy of AN2728. We have initiated a final Phase 2b trial for AN2728 in psoriasis that matches the anticipated design of our planned Phase 3 trials in which patients will be randomized to receive either AN2728 or vehicle. Following the completion of this Phase 2b trial, we plan to initiate a Phase 3 trial in the second half of 2011. We are also exploring the activity of AN2728 for the treatment of atopic dermatitis, and plan to initiate a Phase 2 trial in this indication in the first half of 2011. This Phase 2 clinical trial will be designed as a two-arm trial evaluating the efficacy and safety of AN2728 and AN2898 compared to vehicle.

GSK '052 is our lead systemic antibiotic for the treatment of infections caused by Gram-negative bacteria. Gram-negative bacterial infections are increasing in prevalence, especially in hospitals, and represent a serious public health challenge due to their growing resistance to currently available drug therapies. According to the New England Journal of Medicine , it is estimated that there were 1.7 million hospital-acquired Gram-negative and Gram-positive infections and approximately 100,000 associated deaths in the United States alone in 2002. The New England Journal of Medicine also indicates that Gram-negative bacteria are responsible for more than 30.0% of hospital-acquired infections and account for approximately 70.0% of hospital-acquired infections in the intensive care unit. IMS Health estimates there were 40 million days of Gram-negative therapy administered in the United States in 2009. Gram-negative bacterial infections are becoming a major global health issue where their growing resistance to currently available drug therapies is rapidly increasing. Furthermore, recently approved Gram-negative antibiotics have been limited to new versions of existing antibiotics, which carry the risk of rapid resistance development from pre-existing mechanisms of resistance. Preclinical studies suggest that GSK '052 could be a novel approach for the treatment of infections caused by a broad range of Gram-negative bacteria, including E. coli , Klebsiella pneumoniae , Citrobacter spp. , S. marcescens , P. vulgaris , Providentia spp. , Pseudomonas aeruginosa and Enterobacter spp.

Due to its unique boron-based chemical structure, GSK '052 specifically targets the bacterial enzyme leucyl-transfer RNA synthetase, or LeuRS, which is required for protein synthesis. The inhibition of protein synthesis leads to termination of cell growth and cell death, eliminating the bacterial infection. Since GSK '052 is the first antibiotic to target LeuRS, bacteria have not developed resistance to it. In preclinical safety, pharmacology and toxicology studies, GSK '052 showed robust activity against multi-resistant Gram-negative bacteria with no cross resistance to existing classes of antibiotics. In a Phase 1 proof-of-concept trial, GSK '052 demonstrated a promising safety profile and linear dose-proportional pharmacokinetic properties, reaching blood levels that were many times higher than the anticipated efficacious dose. If approved, we believe GSK '052 would be the first new class of antibacterial agents to treat serious hospital-acquired Gram-negative infections in thirty years. In addition, we believe GSK '052 has the potential to be the first antibiotic specifically targeting infections caused by Gram-negative bacteria that can be administered by both IV and oral routes, which would allow patients to continue on the same antibiotic therapy they received in the hospital once they are discharged.

Following the completion of the Phase 1 trial, GSK exercised its option to obtain an exclusive license to develop and commercialize GSK '052 and has assumed responsibility for further development of the product candidate and any resulting commercialization. Following the exercise of the option in July 2010, we received a fee of $15.0 million. We are eligible to receive further development milestones up to $69.0 million, commercial milestones up to $175.0 million and double-digit tiered royalties with the potential to reach the mid-teens on annual net sales. We believe GSK currently plans to develop GSK '052 as a potential treatment for complicated urinary tract infections, or cUTI, complicated intra-abdominal infections, or cIAI, and other Gram-negative bacterial infections, such as hospital-acquired and ventilator-associated pneumonia, or HAP/VAP. We anticipate that GSK will initiate Phase 2 trials of GSK '052 in patients with cUTI and cIAI in 2011.

Our clinical pipeline also includes two additional product candidates that may extend and expand the market opportunity of our dermatology portfolio. AN2718, our second topical antifungal product candidate, has the potential to treat onychomycosis and fungal infections of the skin. We expect to initiate a Phase 2 trial of AN2718 in onychomycosis after we have completed Phase 3 trials with AN2690. AN2898, our second topical anti-inflammatory product candidate, has the potential to treat psoriasis and atopic dermatitis. We expect to initiate a two-arm Phase 2 trial with AN2898 and AN2728 compared to vehicle in atopic dermatitis in the first half of 2011.

Boron Chemistry Platform

All of our current research and development programs, including our five clinical product candidates, are based on compounds that have been internally discovered using our boron chemistry platform. Boron is a naturally occurring element that is ingested frequently through consumption of fruits, vegetables, milk and coffee. Boron has two attributes that we believe confer compounds with drug-like properties. First, boron-based compounds have a unique geometry that allows them to have two distinct shapes, giving boron-based drugs the ability to interact with biological targets in novel ways and to address targets not amenable to intervention by traditional carbon-based compounds. Second, boron's enhanced reactivity as compared to carbon allows us to design molecules that can hit targets that are difficult to inhibit with carbon chemistry.

Despite the ubiquity of boron in the environment, researchers have faced challenges in evaluating boron-based compounds as product candidates due to previously limited understanding of the physical properties necessary to provide boron-based compounds with the chemical and biological attributes required of pharmaceutical therapies as well as difficulty in chemical synthesis.

We have developed expertise and an understanding of the interactions of boron-based compounds with key biological targets relevant to treating disease. This know-how is primarily related to methods for modulating boron's reactivity to optimize reactions with the target and minimize unwanted chemical reactivity. Our advances have enabled the efficient optimization of disease-modifying properties for our lead compounds and their rapid progression from the research stage into clinical trials.

Additionally, we have discovered new methods of synthesis of boron compounds, allowing for the creation of new compound families with broad chemical diversity and retention of drug-like properties. These new compound families expand the universe of biological targets that can be addressed by small-molecule, boron-based compounds. We have been in operation since 2002 and began generating clinical candidates in our second year. Since that time, we have discovered and synthesized thousands of boron-containing molecules, and of these, five are currently in clinical development. The rate of discovery of molecules and promotion to clinical development has occurred at a relatively constant rate.

We believe our focus on boron-based chemistry provides us with multiple advantages in the small-molecule drug discovery process. These advantages include:

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Novel access to biological targets. Due to the unique geometry and reactivity of boron-based molecules, our boron-based compounds are able to modulate existing biological targets and can address targets not amenable to intervention by traditional carbon-based compounds. This may enable us to treat diseases that have not been effectively addressed by carbon-based compounds, for example, by developing antibiotic or antifungal therapies that kill pathogens that have become resistant to existing drugs.

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Broad utility across multiple disease areas. Our compounds have exhibited extensive preclinical activity in multiple disease areas, including fungal, inflammatory and bacterial diseases, which are our core areas of focus, as well as in parasitic, cancer and ophthalmic indications and for applications in animal health.

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Rapid and efficient synthesis of drug-like compounds. Our proprietary technological advances in the synthesis of boron-based compounds, coupled with our rational drug design capabilities, have enabled us to rapidly create large families of boron-based compounds with drug-like properties. We believe that these advances have made manufacturing of boron-based compounds economical on a commercial scale.

Our objective is to discover, develop and commercialize proprietary boron-based drug compounds with superior efficacy, safety and convenience for the treatment of a variety of diseases. The key elements of our strategy to achieve this objective are to:

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Drive rapid, efficient discovery of novel boron-based compounds. We believe the unique characteristics of boron and the expertise we have developed allow us to design novel product candidates that target a broad range of diseases and drive a rapid and efficient drug development process. We have discovered and advanced five compounds that are currently in clinical development during our first nine years of operations and, in addition, have other active research and development programs ongoing.

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Focus development activities in our core therapeutic areas. We intend to focus our development activities in our core therapeutic areas of fungal, inflammatory and bacterial diseases. To fully leverage our boron chemistry platform, we have established and will continue to pursue development partnerships in these therapeutic areas.

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Commercialize our products ourselves in specialty markets in the United States. We intend to build a sales force to focus on domestic specialty markets, such as dermatology. We have entered into and will continue to seek commercialization partners for products in non-specialty and international markets.

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Leverage partnerships for non-core therapeutic areas. We believe boron chemistry has utility in a broad range of diseases outside of our core therapeutic areas. To maximize the value of our boron chemistry platform and to provide non-dilutive capital to support development in our core therapeutic areas, we have entered into and will continue to seek partnerships early in development for compounds in non-core areas, such as parasitic, cancer and ophthalmic indications and for applications in animal health.

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Expand and protect our intellectual property. We intend to expand and aggressively prosecute our intellectual property in the area of boron chemistry and boron-based compounds. Since a relatively limited amount of research has been done in the area of boron-based drug development, we believe that we can establish a defensible and valuable intellectual property portfolio.

CEO BACKGROUND

The Board is divided into three classes: Class I, Class II and Class III, with each class having a three-year term. Vacancies on the Board may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board to fill a vacancy in a class, including vacancies created by an increase in the number of directors, shall serve for the remainder of the full term of that class and until the director's successor is duly elected and qualified.

The Board presently has seven members. There are two directors in Class III whose term of office expires in 2013. Each of the nominees for election to Class III, Paul L. Berns and Lucy Shapiro, is currently a director of the Company. Dr. Shapiro was previously elected by the stockholders. Mr. Berns was appointed to the Board in May 2012. If re-elected at the Annual Meeting, each of these nominees would serve until the 2016 Annual Meeting of Stockholders and until his or her successor has been duly elected and qualified, or, if sooner, until the director's death, resignation or removal. It is the Company's policy to encourage directors and nominees for director to attend the Annual Meeting. All of the current Directors attended the 2012 Annual Meeting of Stockholders, other than Paul L. Berns.

Directors are elected by a plurality of the votes of the holders of shares present in person or represented by proxy and entitled to vote on the election of directors. The two nominees receiving the highest number of affirmative votes will be elected. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the two nominees named below. If any nominee becomes unavailable for election as a result of an unexpected occurrence, shares that would have been voted for that nominee will instead be voted for the election of a substitute nominee proposed by the Company. Each person nominated for election has agreed to serve if elected. The Company's management has no reason to believe that any nominee will be unable to serve.

The following is a brief biography as of March 31, 2013 of each nominee and each director whose term will continue after the Annual Meeting.

NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2016 ANNUAL MEETINGâCLASS III

Paul L. Berns , age 46, has served as a member of our Board since May 2012. Mr. Berns is a self-employed consultant to the pharmaceutical industry. From March 2006 to August 2012 Mr. Berns served as President and Chief Executive Officer, and member of the Board of Directors, of Allos Therapeutics, Inc., which was acquired by Spectrum Pharmaceuticals, Inc. in August 2012. From July 2005 to March 2006, Mr. Berns was a self-employed consultant to the pharmaceutical industry. From June 2002 to July 2005, Mr. Berns was President, Chief Executive Officer and a director of Bone Care International, Inc., a specialty pharmaceutical company that was acquired by Genzyme Corporation in 2005. From 2001 to 2002, Mr. Berns served as Vice President and General Manager of the Immunology, Oncology and Pain Therapeutics business unit of Abbott Laboratories. From 2000 to 2001, he served as Vice President, Marketing of BASF Pharmaceuticals/Knoll and from 1990 to 2000, Mr. Berns held various positions, including senior management roles, at Bristol-Myers Squibb Company. Mr. Berns has been a director of Anacor Pharmaceuticals, Inc. since May 2012, Jazz Pharmaceuticals, PLC since June 2010 and of XenoPort, Inc. since 2005. Mr. Berns received a B.S. in Economics from the University of Wisconsin. The Nominating and Corporate Governance Committee believes that Mr. Bern's management and operational experience at multiple biopharmaceutical companies, as well as his service on several public company boards, is valuable to our Board.

Lucy Shapiro, Ph.D. , age 72, one of our co-founders, has served as a member of our Board since our inception in 2000. She is also the co-chair of our scientific advisory board. Dr. Shapiro, the Virginia and D.K. Ludwig Professor of Cancer Research and Director of the Beckman Center for Molecular and Genetic Medicine in the School of Medicine at Stanford University, has been at Stanford University since 1989. Dr. Shapiro is a Fellow of the American Association for the Advancement of Sciences and has been elected to the National Academy of Sciences, the American Academy of Microbiology, the American Academy of Arts and Sciences and the Institute of Medicine of the National Academy of Sciences for her work in the fields of molecular biology and microbiology. She was elected to the American Philosophical Society and received the Selman Waksman Award from the National Academy of Sciences in 2005 and in 2009 was given the Canada Gairdner International Award, considered one of the most prestigious awards in biomedical science. In 2010, she was presented with the Abbott Lifetime Achievement Award. Dr. Shapiro is currently a non-executive director of Pacific Biosciences of California, Inc., and she was a non-executive director of GenProbe from 2008 to 2012 and of GSK from 2001 to 2006. She received a B.S. from Brooklyn College and a Ph.D. in molecular biology from the Albert Einstein School of Medicine. The Nominating and Corporate Governance Committee believes that Dr. Shapiro's extensive scientific expertise and knowledge of our boron chemistry platform are valuable to our Board.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE.

DIRECTORS CONTINUING IN OFFICE UNTIL THE 2014 ANNUAL MEETINGâCLASS I

David P. Perry , age 45, has served as our President and Chief Executive Officer since March 2002 and has been a member of our Board since April 2002. In 1997, Mr. Perry founded Chemdex Corporation, a business-to-business marketplace company that focused on the life sciences industry, which was acquired by NexPrise Inc., and until 2001 served as its Chief Executive Officer. In 1995, Mr. Perry co-founded ViroGen, Inc., a biotech company based in Boston. Mr. Perry currently serves on the board of directors of the Infectious Disease Research Institute, a not-for-profit organization. Mr. Perry has a B.S. from the University of Tulsa and an M.B.A. from Harvard Business School. The Nominating and Corporate Governance Committee believes that Mr. Perry's extensive experience with our Company, which is a consequence of his long tenure as President and Chief Executive Officer, brings necessary historic knowledge and continuity to our Board. In addition, the Nominating and Corporate Governance Committee believes that his experiences prior to joining us provided him with operational and industry expertise that are important to our Board.

Anders D. Hove, M.D. , age 47, has served as a member of our Board since 2005. Dr. Hove is a general partner of Venrock Associates, a venture capital firm, which he joined in January 2004. From 1996 to 2004, Dr. Hove was a fund manager at BB Biotech Fund, an investment firm, and from 2002 to 2003 he also served as Chief Executive Officer of Bellevue Asset Management, LLC, an investment company. Dr. Hove is a member of the board of directors of World Heart Corporation, Alimera Sciences, Inc. and a number of private companies. He received an M.Sc. from the Technical University of Denmark, an M.D. from the University of Copenhagen and an M.B.A. from the Institut EuropĂŠen d'Administration des Affaires, or INSEAD. The Nominating and Corporate Governance Committee believes that Dr. Hove's experience in venture capital and in investing in life sciences companies, as well as his medical background, are valuable to our Board.

DIRECTORS CONTINUING IN OFFICE UNTIL THE 2015 ANNUAL MEETINGâCLASS II

Mark Leschly , age 44, our Chairman, has served as a member of our Board since 2002. Since July 1999, Mr. Leschly has been a managing partner with Rho Capital Partners, Inc., an investment and venture capital management company. From 1994 through 1999, Mr. Leschly was an Associate and then a general partner of HealthCare Ventures, L.P., a venture capital management company. Mr. Leschly previously served as a director of Verenium Corporation, NitroMed, Inc., Senomyx, Inc. and Tercica, Inc., and he is on the board of a number of private companies. Mr. Leschly received an A.B. from Harvard University and an M.B.A. from the Stanford Graduate School of Business. The Nominating and Corporate Governance Committee believes that Mr. Leschly's experience in venture capital and in investing in life sciences companies is valuable to our Board. In addition, the Nominating and Corporate Governance Committee believes that Mr. Leschly's prior service on several public company boards has given him experience in corporate governance matters, which is valuable in his position as Chairman of our Board.

Paul H. Klingenstein , age 57, has served as a member of our Board since 2002. He is the managing partner of Aberdare Ventures, a venture capital firm which he founded in 1999. Formerly, he was a partner of Accel Partners. Earlier he was an employee of Warburg Pincus and an advisor to the Rockefeller Foundation. Mr. Klingenstein is currently a director of EnteroMedics Inc. and several private companies. He is a former director of Aviron, Glycomed Inc., Isis Pharmaceuticals, Inc., Pharmion Corporation, Viagene, Inc., Xomed Inc., and several private companies and is Board Chairman of the International AIDS Vaccine Initiative. He received an A.B. from Harvard University and an M.B.A. from the Stanford Graduate School of Business. The Nominating and Corporate Governance Committee believes that Mr. Klingenstein's experience in venture capital and in investing in life sciences companies is valuable to our Board.

William J. Rieflin , age 53, has served as a member of our Board since March 2011. Since September 2010, he has been the Chief Executive Officer and a director of NGM Biopharmaceuticals, Inc., a biotechnology company. From 2004 until 2010, he served as President of XenoPort, Inc., a biotechnology company focused on the discovery and development of transported prodrugs. From 1996 to 2004, he held various positions with Tularik Inc., a biotechnology company focused on the discovery and development of product candidates based on the regulation of gene expression, the most recent of which was Executive Vice President, Administration, Chief Financial Officer, General Counsel and Secretary. Amgen Inc., a biotechnology company, acquired Tularik in 2004. Mr. Rieflin is currently a director of XenoPort, Inc. and NGM Biopharmaceuticals, Inc. Mr. Rieflin received a B.S. from Cornell University, an M.B.A. from the University of Chicago Graduate School of Business and a J.D. from Stanford Law School. The Nominating and Corporate Governance Committee believes that Mr. Rieflin's management, operational and financial experience at multiple biopharmaceutical companies is valuable to our Board. Mr. Rieflin's experience qualifies him to serve as an "audit committee financial expert" (as that term is defined in Item 407(d)(5) of Regulation S-K) and to provide oversight of our financial strategies.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. We have discovered, synthesized and developed five molecules that are currently in clinical development.

Our three lead programs are: AN2690, a topical antifungal for the treatment of onychomycosis, a fungal infection of the nail and nail bed; AN2728, a topical anti-inflammatory for the treatment of psoriasis and atopic dermatitis; and GSK '052, a systemic antibiotic for the treatment of infections caused by Gram-negative bacteria. Our most advanced product candidate is AN2690. We initiated our Phase 3 clinical trials for AN2690 in the fourth quarter of 2010. In June 2010, we completed a Phase 2b dose-ranging trial in psoriasis for AN2728, and we initiated a final Phase 2b clinical trial in psoriasis in the first quarter of 2011. In June 2010, we completed a Phase 1 trial of GSK2251052, or GSK '052 (formerly referred to as AN3365), and achieved proof-of-concept as defined under our collaboration agreement with GlaxoSmithKline LLC, or GSK. In July 2010, GSK exercised its option to obtain an exclusive license to develop and commercialize GSK '052 and paid us an option exercise fee of $15.0 million in August 2010. In addition to our three lead programs, we have two other clinical product candidates, AN2718, our second topical antifungal product candidate, and AN2898, our second topical anti-inflammatory product candidate. We also have a pipeline of internally discovered topical and systemic boron-based compounds in development. In August 2010, we entered into a collaboration with Eli Lilly and Company, or Lilly, under which we will collaborate to discover products for a variety of animal health applications and in February 2011, we entered into a research and development collaboration with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop compounds directed against a target for the potential treatment of acne.

In February 2007, we entered into an exclusive license, development and commercialization agreement with Schering Corporation, or Schering, for the development and worldwide commercialization of AN2690. Pursuant to the agreement, Schering paid us a $40.0 million non-refundable, non-creditable upfront fee and assumed sole responsibility for development and commercialization of AN2690. In addition, in accordance with the agreement, Schering invested $10.0 million in a preferred stock financing completed in December 2008. The agreement also obligated Schering to pay all of the remaining costs for development and commercialization of AN2690, including paying us for our development-related activities to transition AN2690 to Schering. In November 2009, Schering merged with Merck & Co., Inc., or Merck, and in May 2010, we entered into a mutual termination and release agreement with Merck. Under this agreement we regained the exclusive worldwide rights to AN2690, Merck paid us $5.8 million and we released each other from any and all claims, liabilities or other types of obligations under the 2007 agreement. Merck did not retain any rights to this compound.

In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. Under the agreement, we are currently working to identify and develop multiple product candidates in three target-based project areas.

In each project, GSK has the option to obtain an exclusive license to develop, commercialize and market worldwide a specified number of product candidates once such candidates have achieved certain proof-of-concept criteria. We are primarily responsible for the discovery and development of each product candidate from the research stage until GSK exercises an option for such product candidate, at which point GSK will assume sole responsibility for the further development and commercialization of such product candidate on a worldwide basis. During the research term, we are committed to use reasonable efforts to discover and optimize compounds pursuant to agreed research plans and to provide specified resources, including certain numbers of full-time equivalent scientists, on a project-by-project basis. Each party is responsible for its own research and development costs.

Pursuant to the agreement, GSK paid us a $12.0 million non-refundable, non-creditable upfront fee in October 2007. In addition, GSK is obligated to make payments to us if certain development, regulatory and commercial milestones are met on a compound-by-compound basis, which range from up to $252.8 million to $330.5 million in the aggregate per product candidate, depending on the product profile of the candidate. Milestone payments may be lower for designated programs depending upon: whether GSK makes the selection of the product candidate before or after initiation of Phase I clinical trial dosing (10%-15% reduction if selected before such dosing); if certain target product profile characteristics are not achieved (20%-40% reduction); and whether the product candidate is designated after the initial two product candidate designations in a program (50% reduction). GSK is further obligated to pay us tiered double-digit royalties with the potential to reach the mid-teens on annual net sales of products containing optioned compounds in jurisdictions where there is a valid patent claim covering composition of matter or method of use of the product and lesser royalties for sales in jurisdictions where there is no such valid patent claim. Such royalties shall continue until the later of expiration of such valid patent claims or ten years from the first commercial sale on a product-by-product and country-by-country basis. GSK also invested $30.0 million in a preferred stock financing completed in December 2008, at which time GSK became a related party. Subsequently, in November 2010, GSK invested an additional $5.0 million in our common stock in connection with our initial public offering, or IPO. From execution of the agreement through December 31, 2010, in addition to the $12.0 million upfront payment, we have received $25.1 million for achievement of performance milestones, including milestones related to GSK '052 for lead declaration, candidate selection, first patient dosing in a clinical trial and an option to obtain an exclusive license to develop and commercialize GSK '052. GSK has assumed responsibility for further development of GSK '052 and any resulting commercialization.

In August 2010, we entered into a collaboration agreement with Lilly, under which the companies will collaborate to discover products for a variety of animal health applications. Lilly will be responsible for worldwide development and commercialization of compounds advancing from these efforts. We received a non-refundable, non-creditable upfront payment of $3.5 million in September 2010 and will receive a minimum of $6.0 million in research funding with the potential of up to $12.0 million in research funding, if successful. In addition, we will be eligible to receive payments upon the achievement of specified development and regulatory milestones, as well as tiered royalties escalating from high single digit to in the tens royalties on sales, depending in part upon the mix of products sold.

In February 2011, we entered into a research and development agreement with Medicis to discover and develop boron-based small molecule compounds directed against a target for the potential treatment of acne. Under the terms of the agreement, we received a $7.0 million upfront payment from Medicis in February 2011 and will be primarily responsible for discovering and conducting early development of product candidates that utilize our proprietary boron chemistry platform. Medicis will have an option to obtain an exclusive license for products covered by the agreement. We will be eligible for future research, development, regulatory and sales milestones of up to $153.0 million, as well as high single-digit to in the tens royalties on sales by Medicis. Medicis will be responsible for further development and commercialization of the licensed products on a worldwide basis.

We began business operations in March 2002. To date, we have not generated any revenue from product sales and have never been profitable. As of December 31, 2010, we have an accumulated deficit of $111.2 million. We have funded our operations primarily through the sale of equity securities, upfront payments and milestone payments under our agreements with Schering, GSK and Lilly, government contracts and grants and borrowings under debt arrangements. We expect to incur losses in future periods. The size of our future losses will depend, in part, on the rate of growth of our expenses, our ability to enter into additional licensing, research and development agreements and future payments earned under our agreements with GSK, Lilly, Medicis or any such future partners. Our intent is to enter into licensing and development agreements with additional partners to further develop certain of our product candidates and to fund other areas of our research. If the GSK, Lilly and/or Medicis agreements are terminated or we are unable to enter into other collaboration agreements, we may incur additional operating losses and our ability to expand and continue our research and development activities and move our product candidates into later stages of development may be limited. We will need to seek additional capital through collaborations, equity and debt financings to fund our operations.

Financial Operations Overview

Revenues

Our recent revenues are comprised primarily of collaboration agreement-related revenues and government grants, while historically we also had government contract revenues. Collaboration agreement-related revenues have included license fees, development reimbursements and development milestones. In addition, we have received a termination and release payment with respect to our previous agreement with Schering. Government grant revenues have consisted of grant funding received from government entities and government contract revenues have included cost and cost plus fixed fee reimbursements for allowable costs.

We have generated approximately $109.9 million in revenue from inception through December 31, 2010. Through 2004, we had recognized cumulative revenues of $16.1 million through our contract with the U.S. Department of Defense for the development of antibiotics against infective anthrax. From 2005 through 2007, we recognized $1.0 million in revenue from a National Institutes of Health, or NIH, grant for the identification of targets for certain antifungal compounds, which included work on the mechanism of action of AN2690. In March 2007, we received from Schering a $40.0 million upfront fee that was recognized ratably over the estimated period during which we performed development-related activities to transition AN2690 to Schering. The estimated period was based on the research transition plan jointly developed by Schering and us. In addition to the upfront fee, we were paid for our development-related activities, which included certain preclinical and clinical activities. Through December 31, 2010, we recognized revenue of $49.5 million under the Schering agreement, which was comprised of the full recognition of the $40.0 million upfront fee and $9.5 million for our development-related transition activities. In November 2009, Schering merged with Merck and in May 2010, upon termination of the 2007 agreement, we regained the exclusive worldwide rights to AN2690 and received a $5.8 million payment from Merck, which was recognized as revenue during 2010.

In October 2007, we received a $12.0 million upfront fee under our agreement with GSK, which we are recognizing ratably over the six-year research term. Through December 31, 2010, we recognized $32.5 million under this agreement which was comprised of $6.5 million related to the upfront fee, $25.1 million for achievement of performance milestones and $0.9 million in reimbursement for patent costs, procurement of drug material and performance of certain clinical studies for GSK '052. In the future, revenue under our agreement with GSK may include fees for our GSK product candidates achieving development, regulatory and sales milestones and product royalties.

In September 2010, we received a non-creditable, non-refundable upfront fee of $3.5 million under our agreement with Lilly, which we are recognizing over the four-year research term on a straight-line basis. Under this agreement, we will receive a minimum of $6.0 million in research funding with the potential of up to $12.0 million in research funding, if successful. Through December 31, 2010, we have recognized $1.4 million under this agreement, which was comprised of $0.3 million related to the upfront fee and $1.1 million in research funding.

From inception through December 31, 2010, we have recognized $2.1 million of revenue for research relating to animal health indications and for research performed under our agreements with not-for-profit organizations for neglected diseases.

In October 2010, we were awarded $1.5 million from the United States Department of the Treasury under the Qualifying Therapeutic Discovery Project Program to support research for six projects with the potential to produce new therapies. The full amount was recognized as government grant revenue in 2010.

Research and Development Expenses

Research and development expenses consist primarily of costs associated with research activities, as well as costs associated with our product development efforts, including preclinical studies and clinical trials. Research and development expenses, including those paid to third parties, are recognized as incurred. Research and development expenses include:

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external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, contract research organizations and investigational sites;

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facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or depreciation of leasehold improvements, equipment and laboratory supplies and other expenses.
Our expenses associated with preclinical studies and clinical trials are based upon the terms of the service contracts, the amount of the services provided and the status of the related activities. We expect that research and development expenses will increase significantly in the future as we progress our product candidates through clinical development, conduct our research and development activities under our agreements with GSK, Lilly and Medicis, advance our discovery research projects into the preclinical stage, and continue our early-stage research.

We expect our research and development expenses to increase in future periods. Our costs associated with AN2690 will increase as we advance our Phase 3 clinical trials. We expect costs associated with AN2728 and AN2898 to increase as we expand the clinical and preclinical activities for these programs. Due to the option exercise by GSK for GSK '052 in July 2010, GSK has assumed all future development costs for this product candidate and therefore our expenses associated with GSK '052 are expected to be minimal in the future. In addition, spending for our early-stage research programs, including our other GSK programs, will be dependent upon our success in developing and advancing new product candidates for these programs. We also expect costs associated with our early stage research activities to increase in future periods primarily as a result of our recent collaborations with Lilly and Medicis and work on neglected diseases.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates. We or our partners may never succeed in achieving marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation and whether our current or future collaborators are committed to and make progress in programs licensed to them. For example, the timing to complete development of GSK '052 will be controlled by GSK because they have exercised their option to license this product candidate. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. Consequently, we are unable to provide a meaningful estimate of the period in which material cash inflows will be received. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential.

Our strategy includes entering into additional collaborations with third parties for the development and commercialization of some of our product candidates. To the extent that third parties have control over preclinical development or clinical trials for some of our product candidates, we will be dependent upon their efforts for the progress of such product candidates. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for our personnel, including stock-based compensation and travel expenses, in executive, finance, business development and other administrative functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expenses, consulting costs associated with financial services, professional fees for legal services, including patent-related expenses, and auditing and tax services. We expect that general and administrative expenses will increase in the future as we expand our operating activities, hire additional staff and incur additional costs associated with operating as a public company.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 of our financial statements included in this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Our contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales milestones, and royalties on product sales of licensed products.

For multiple element arrangements, we evaluate the components of each arrangement as separate elements based on certain criteria. Accordingly, revenues from collaboration agreements are recognized based on the performance requirements of the agreements. We recognize revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed and determinable; and collection is reasonably assured.

Upfront payments for licensing our intellectual property generally are not separable from the activity of providing research and development services because the license does not have stand-alone value separate from the research and development services provided. Such upfront payments are recorded as deferred revenue in the balance sheet and are recognized as contract revenue over the contractual or estimated performance period, which is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. We regularly review the basis for our estimates, and we may change the estimates if circumstances change. These changes can significantly increase or decrease the amount of revenue recognized. To date, we have not experienced significant changes in our estimates.

Payments resulting from our research and development efforts under license agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations and approximate revenue recognized.

Substantive, at-risk milestone payments are recognized as revenue when the milestone is achieved and collectibility is assured. When payments are not for substantive and at-risk milestones, revenue is recognized over the estimated remaining term of the service period.

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. To date, we have not earned any royalty revenue from product sales.

We estimate our preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on our behalf. In recording service fees, we estimate the time period over which the related services will be performed and compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust our accrual or deferred advance payment accordingly. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical study and clinical trial accruals.

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period). We use the Black-Scholes option-pricing model as the most appropriate fair-value method for our stock-based awards. For options granted prior to January 1, 2006, we used the graded-vested (multiple option) method for expense attribution and, prior to January 1, 2006, recognized option forfeitures as they occurred. For options granted after January 1, 2006, we use the straight-line (single option) method for expense attribution and estimate forfeitures and recognize expense only for those shares expected to vest.

We account for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of our common stock.

We recorded noncash stock-based compensation expense for employee and nonemployee stock option grants of $2.0 million, $2.5 million, and $2.8 million during 2008, 2009 and 2010, respectively. Based on stock options outstanding as of December 31, 2010, we had unrecognized stock-based compensation expense for employees, net of estimated forfeitures, of $3.6 million, which will be recognized over a weighted-average period of 1.9 years. We expect to continue to grant stock options in the future, which will increase our stock-based compensation expense in future periods. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

As of December 31, 2010, we had outstanding vested options to purchase 1,275,609 shares of our common stock and unvested options to purchase 667,643 shares of our common stock with intrinsic values of $3.0 million and $0.1 million, respectively, based on the differences between the exercise prices of the underlying options and the year-end closing price of our common stock of $5.37 per share.

Fair Values of Preferred Stock Warrants

Prior to the our IPO, outstanding warrants to purchase shares of our convertible preferred stock were freestanding warrants that were exercisable into convertible preferred stock that was subject to redemption and were therefore classified as liabilities in the balance sheet at fair value. The initial liability recorded was adjusted for changes in the fair values of our preferred stock warrants during each reporting period and was recorded as a component of other income (expense) in the statement of operations for that period.

We estimated the fair values of these warrants using the Black-Scholes option-pricing model based on inputs for the estimated fair value of the underlying convertible preferred stock at the valuation measurement date, the remaining contractual terms of the warrant, risk-free interest rates, expected dividend rates and expected volatility of the price of the underlying convertible preferred stock. We estimated the fair value of the convertible preferred stock using valuation analysis methods, inputs and assumptions consistent with those we used for our common stock valuations, giving consideration to the preferences and other terms of the convertible preferred stock. Our estimates were based, in part, on subjective assumptions.

Upon closing of our IPO and the conversion of the underlying preferred stock to common stock, all outstanding warrants to purchase shares of our preferred stock were automatically converted into warrants to purchase shares of our common stock. The aggregate fair value of our warrants upon the closing of the IPO was reclassified from liabilities to additional paid-in capital, a component of stockholders' equity (deficit), and we ceased recording any related periodic fair value adjustments as all such amounts are recorded in additional paid in capital.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. The productivity of our internal discovery capability has enabled us to generate a pipeline of both topical and systemic boron-based compounds. We have discovered, synthesized and developed eight molecules that are currently in development.

Our lead product candidates include two topically administered dermatologic compoundsâtavaborole (formerly referred to as AN2690), an antifungal for the treatment of onychomycosis, and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In addition, we have three other wholly-owned clinical product candidatesâAN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively, and AN3365 (formerly referred to as GSK2251052, or GSK â052), an antibiotic for the treatment of infections caused by Gram-negative bacteria, which was previously licensed to GlaxoSmithKline, LLC, or GSK. In October 2012, GSK advised us that it had discontinued further development of AN3365; substantially all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. We have also discovered three other compounds that we have out-licensed for further developmentâone is licensed to Eli Lilly and Company, or Lilly, for the treatment of animal health indications, the second compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative, or DNDi, for human African trypanosomiasis (HAT, or sleeping sickness) and a third compound is licensed to GSK for development in tuberculosis. We also have a pipeline of other internally discovered topical and systemic boron-based compounds in development.

Our most advanced product candidate is tavaborole. In the first quarter of 2013, we reported positive results from two Phase 3 trials conducted under a Special Protocol Assessment, or SPA, with the United States Food and Drug Administration, or FDA. Tavaborole achieved a high degree of statistical significance on all primary and secondary endpoints.

In the first study (known as Study 301), 6.5% of patients treated with tavaborole met the primary endpoint of ââcomplete cureââ vs. 0.5% of patients treated with vehicle (p=0.001) at week 52. ââComplete cureââ is a composite endpoint that requires both a mycological cure and a completely clear nail and is consistent with the FDA endpoint requirement for Lamisil. Among the secondary endpoints at week 52, 26.1% of patients treated with tavaborole achieved a ââcompletely clearââ or ââalmost clearââ ( < 10% clinical involvement) nail vs. 9.3% in the vehicle-treated arm (p<0.001); 31.1% of patients treated with tavaborole achieved mycologic cure vs. 7.2% in the vehicle-treated arm (p<0.001)); and 15.3% of patients treated with tavaborole achieved ââcompletely clearââ or ââalmost clearââ nail with mycological cure vs. 1.5% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 87.0% of patients treated with tavaborole had a negative fungal culture vs. 47.9% in the vehicle-treated arm (p<0.001) at week 52, and 24.6% of patients treated with tavaborole achieved ââcompletely clearââ or ââalmost clearââ nail and negative culture vs. 5.7% in the vehicle-treated arm (p<0.001) at week 52.

In the second study (known as Study 302), 9.1% of patients treated with tavaborole met the primary endpoint of ââcomplete cureââ vs. 1.5% of patients treated with vehicle (p<0.001) at week 52. Among the secondary endpoints at week 52, 27.5% of patients treated with tavaborole achieved a ââcompletely clearââ or ââalmost clearââ nail vs. 14.6% in the vehicle-treated arm (p<0.001); 35.9% of patients treated with tavaborole achieved mycologic cure vs. 12.2% in the vehicle-treated arm (p<0.001)); and 17.9% of patients treated with tavaborole achieved ââcompletely clearââ or ââalmost clearââ nail with mycological cure vs. 3.9% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 85.4% of patients treated with tavaborole had a negative fungal culture vs. 51.2% in the vehicle-treated arm (p<0.001) at week 52, and 25.3% of patients treated with tavaborole achieved ââcompletely clearââ or ââalmost clearââ nail and negative culture vs. 9.3% in the vehicle-treated arm (p<0.001) at week 52.

In both studies, tavaborole was safe and well-tolerated across study subjects, and there were no serious adverse events related to study drug. We filed a New Drug Application, or NDA, for tavaborole in July 2013. In September 2013, the NDA was accepted for review by the FDA and the Prescription Drug User Fee Act (PDUFA) V goal date is July 29, 2014.

For AN2728, we completed a Phase 2 trial in psoriasis in 2010 and both a Phase 1 absorption trial and a Phase 2 trial in psoriasis in 2011. We also completed a Phase 2 trial of AN2728 and AN2898, our second topical anti-inflammatory product candidate, in mild-to-moderate atopic dermatitis in the fourth quarter of 2011. In early 2012, we completed two safety studies of AN2728. Given the positive outcome from our atopic dermatitis trial, the safety profile exhibited by AN2728 and the large unmet need in atopic dermatitis relative to psoriasis, we intend to focus our AN2728 development efforts on atopic dermatitis in the near future and defer the start of the Phase 3 trial for psoriasis. As such, we initiated a Phase 2 safety, pharmacokinetics, or PK, and efficacy trial for mild-to-moderate atopic dermatitis in adolescents in July 2012 and a Phase 2 dose-ranging study in mild-to-moderate atopic dermatitis in adolescents in August 2012. We completed the Phase 2 safety, PK and efficacy trial in December 2012 with positive results. We completed the Phase 2 dose-ranging trial in March 2013, which demonstrated a clear dose response across four dosing regimens and helped identify the 2.0% BID dosing regimen as optimal for our Phase 3 program in mild-to-moderate atopic dermatitis. We initiated a MUSE (maximal use systemic exposure) study in children with atopic dermatitis in July 2013 and a cardiac safety trial for AN2728 in atopic dermatitis in August 2013. In addition to the MUSE study and the cardiac safety trial, we currently anticipate that the remaining clinical studies that will be required for an NDA filing for AN2728 for mild-to-moderate atopic dermatitis include drug-to-drug interaction studies, repeat insult patch tests for cumulative irritation and sensitization, two Phase 3 trials and a long-term safety trial. Subject to the results of the MUSE study and the cardiac safety study and a successful end of Phase 2 meeting with the FDA, we expect to initiate our Phase 3 trials for AN2728 in the first half of 2014.

In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. In September 2011, we amended and expanded the GSK agreement to, among other things, add a new research program using our boron chemistry platform for tuberculosis, or TB. In September 2013, GSK selected a compound for further development in TB and will be responsible for all further development and commercialization of this compound.

In August 2010, we entered into a research, license and commercialization agreement with Lilly, under which we are collaborating to discover products for a variety of animal health applications. Pursuant to this agreement, Lilly selected the first development compound for an animal health indication in August 2011 and, in December 2012, they selected a second development compound for another animal health indication. In September 2013, Lilly notified us that it was ceasing further development of the first compound; Lilly has granted us a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents. Lilly will be responsible for all further development and commercialization of the second compound.

In February 2011, we entered into a research and development option and license agreement with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop compounds directed against a target for the potential treatment of acne, or the Medicis Agreement. On November 28, 2012, we filed for arbitration for breach of contract by Medicis seeking damages in the form of payment for the achievement of certain preclinical milestones under the collaboration. On December 11, 2012, Medicis filed a complaint for breach of the collaboration and a motion for preliminary injunction seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the agreement. Medicis was acquired by Valeant Pharmaceuticals International, Inc., or Valeant, in December 2012. On October 27, 2013, as part of a settlement with Valeant related to arbitration on another unrelated matter, we and Valeant agreed to withdraw all claims and complaints relating to arbitration or litigation in connection with the Medicis Agreement, to terminate the Medicis Agreement effective October 27, 2013 and that all rights and intellectual property under the Medicis Agreement would revert back to us.

In April 2013, we entered into a research agreement with the Bill & Melinda Gates Foundation, or the Gates Foundation, to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and TB. Under the agreement, the Gates Foundation will pay us up to $17.7 million over a three-year research term to conduct research activities directed at discovering potential neglected disease drug candidates in accordance with an agreed upon research plan. As part of the funded research activities, we are responsible for creating an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases, which will be accessible to the Gates Foundation and other third parties. Under the terms of the agreement, the Gates Foundation will have the exclusive right to commercialize selected drug candidates in specified neglected diseases in specified developing countries. We retain the exclusive right to commercialize any selected drug candidate outside of the specified neglected diseases as well as with respect to the specified neglected diseases in specified developed countries and would be obligated to pay the Gates Foundation royalties on specified license revenue received. The agreement will continue in effect until the later of five years from the effective date or the expiration of our specified obligation to provide access to the expanded library compounds.

In connection with the Gates Foundation agreement, we issued 809,061 shares of unregistered common stock at a purchase price of $6.18 per share for aggregate gross proceeds of $5.0 million. The shares were subsequently registered with the SEC under a Form S-3 filed on June 28, 2013, which became effective on July 11, 2013. In the event of termination of the agreement by the Gates Foundation for certain specified uncured material breaches by us, we will be obligated, among other remedies, to either redeem our common stock purchased in connection with the agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. In addition, the Gates Foundation agreement places certain restrictions on our use of the research funding and the redeemable common stock proceeds we receive from the Gates Foundation.

On October 16, 2013, we entered into a research agreement with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) to design and discover new classes of systemic antibiotics. A drug discovery consortium formed by Colorado State University, the University of California at Berkeley and us will conduct the research over a three and a half year period. The work is funded by a $13.5 million award from DTRAâs R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, we will apply our boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. The $13.5 million award is available to fund $2.7 million of research reimbursements for the first eleven month period through September 30, 2014, and an additional $5.0 million and $5.7 million will become available upon DTRA exercising their options to fund the subsequent twelve and nineteen-month periods, respectively.

We also have several collaborations with organizations that fund research leveraging our boron chemistry to discover new treatments for neglected diseases. In addition to potentially developing new therapies for such diseases, these collaborations provide us the potential benefits of expanding the chemical diversity of our boron compounds, understanding new properties of our boron compounds, receiving future incentives, such as the potential grant of a priority review voucher by the FDA, and ultimately, if a drug is approved, potential revenue in some regions. Our collaboration partners include DNDi to develop new therapeutics for HAT, visceral leishmaniasis and Chagas disease, MMV to develop compounds for the treatment of malaria, the Global Alliance for Livestock Veterinary Medicines (GALVMed) for the treatment of African animal trypanosomiasis and the Liverpool School of Tropical Medicine for the treatment of river blindness and lymphatic filariasis. In 2011, DNDi completed pre-clinical studies of AN5568 for HAT and, in March 2012, AN5568 became the first compound from our neglected diseases initiatives to enter human clinical trials.

In December 2012, we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration was declared effective by the SEC on December 21, 2012 and permits us to sell, from time to time, up to $75.0 million of common stock, preferred stock, debt securities and warrants.

In January 2013, we entered into an equity distribution agreement with Wedbush Securities Inc., or Wedbush, under which we may, from time to time, offer and sell common stock having aggregate sales proceeds of up to $25.0 million through Wedbush, or to Wedbush, for resale. Sales of our common stock through Wedbush will be made by means of ordinary brokersâ transactions on The NASDAQ Global Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by us and Wedbush and may be made in sales deemed to be âat-the-marketâ equity offerings. We will pay Wedbush a commission, or allow a discount, as the case may be, in each case equal to 2.0% of the gross sales proceeds of any common stock sold through Wedbush as agent under this agreement. We have also agreed to reimburse Wedbush for certain expenses up to an aggregate of $150,000, of which $45,000 has been incurred through September 30, 2013. Under the terms of this agreement, we also may sell our common stock to Wedbush, as principal for its own account, at a price to be agreed upon at the time of sale. Through September 30, 2013, we have sold 401,500 shares of our common stock under the Agreement. No shares were sold under this agreement during the three months ended September 30, 2013. The net proceeds from these sales were approximately $1.3 million, after deducting the underwriting discount and other offering costs, and we may sell up to an additional $23.6 million in authorized but unsold shares of our common stock under this agreement.

In May 2013, we issued and sold 3,599,373 shares of our common stock, including 469,483 shares issuable to the underwriters pursuant to the overallotment option, in connection with an underwriting agreement with Cowen and Company, LLC, as representative of the several underwriters. The price to the public in this offering was $6.39 per share, for gross proceeds of approximately $23.0 million, and the underwriters purchased the shares from us at a price of $6.0066 per share. Our net proceeds from this offering were approximately $21.3 million, after deducting the underwriting discount and other offering costs.

In June 2013, we entered into a loan and security agreement with Hercules Technology Growth Capital, Inc. as collateral agent and a lender and Hercules Technology III, L.P. as a lender, or together, Hercules, under which we may borrow up to $45.0 million in three tranches of $30.0 million, $10.0 million and $5.0 million. We borrowed the first tranche upon the closing of the transaction. We used $22.6 million of the proceeds to repay the remaining obligation under our previous loan and security agreement with Oxford Finance Corporation, or Oxford, and Horizon Technology Finance Corporation, or Horizon, and expect to use the remainder of the proceeds from the first tranche to fund development and commercialization activities related to our product candidates.

In August 2013, we filed an additional shelf registration statement on Form S-3 with the SEC. The shelf registration was declared effective by the SEC on September 23, 2013 and permits us to sell, from time to time, up to $50.0 million of common stock, preferred stock, debt securities and warrants.

On October 24, 2012, we provided notice to Valeant, successor in interest to Dow Pharmaceutical Sciences, Inc., or DPS, seeking to commence arbitration before JAMS of a breach of contract dispute under a master services agreement dated March 26, 2004 between DPS and us related to certain development services provided by DPS in connection with our efforts to develop a topical antifungal product candidate for the treatment of onychomycosis. Our assertions included breach of contract, breach of implied covenant of good faith and fair dealing, misappropriation of trade secrets and unfair competition. The final hearing was held in September 2013 and, on October 17, 2013, the arbitrator issued an Interim Final Award in our favor for $100.0 million in damages as well as all costs of the arbitration and reasonable attorneyâs fees. On October 27, 2013, we entered into a settlement agreement with Valeant and DPS pursuant to which Valeant agreed to pay us $142.5 million to settle all existing and future claims, including damages awarded in the October 17, 2013 arbitration ruling, and all other disputes between Valeant, DPS and us related to our intellectual property, confidential information and contractual rights. Under the settlement agreement, we provided Valeant with a paid-up, irrevocable, non-exclusive, worldwide license to all patents that contain claims covering efinaconazole, Valeantâs topical antifungal product candidate for the treatment of onychomycosis. In addition, the settlement agreement provided that both we and Valeant would withdraw all claims and complaints relating to arbitration or litigation in connection with the Medicis Agreement, that the Medicis Agreement would be terminated effective October 27, 2013 and that all rights and intellectual property under the Medicis Agreement revert back to us. Valeant made the $142.5 million payment to us on November 7, 2013.

We began business operations in March 2002. To date, we have not generated any revenue from product sales and have never been profitable. As of September 30, 2013, we have an accumulated deficit of $261.2 million. We have funded our operations primarily through the sale of equity securities, payments received under our agreements with Schering Corporation, or Schering, GSK, Lilly, Medicis and the Gates Foundation, government contracts and grants, contracts with not-for-profit organizations for neglected diseases and borrowings under debt arrangements. We expect to incur operating losses in future years. The size of our future operating losses will depend, in part, on the rate of growth of our expenses, our ability to enter into additional licensing, research and development agreements and future payments earned under our agreements with GSK, Lilly, the Gates Foundation, DTRA or any such future collaboration partners or research funding providers. Our intent is to enter into additional licensing and development agreements to further develop certain of our product candidates and to fund other areas of our research. If the GSK, Lilly, Gates Foundation or DTRA agreements are terminated or we are unable to enter into other collaboration or research funding agreements, we may incur additional operating losses and our ability to expand and continue our research and development activities and move our product candidates into later stages of development may be limited. Management believes that we currently have sufficient capital resources, including the $142.5 million payment received under our settlement agreement with Valeant and the available funds under our expanded debt facility, to fund our operations for at least the next twelve months.

Critical Accounting Policies and Significant Judgments and Estimates

Our managementâs discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, preclinical study and clinical trial accruals, accrued compensation, deferred advance payments and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in our Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed financial statements.

Revenue Recognition

Our contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

For multiple element arrangements, we evaluate the components of each arrangement as separate elements based on certain criteria. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the agreements. We recognize revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.

For arrangements with multiple deliverables, we evaluate each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. Our management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements.

Upfront payments for licensing our intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by us. Typically, we have determined that the licenses we have granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the condensed balance sheet and are recognized as contract revenue over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

Some arrangements involving the licensing of our intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby we agree that, for a specified period of time, we will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that we will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. We do not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

Payments resulting from our efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services. The costs associated with these activities are reflected as a component of research and development expense in our condensed statements of operations and approximate the revenues recognized from such activities.

For certain contingent payments under research and development arrangements, we recognize revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaboration partnerâs performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. To date, none of our products have been approved and therefore we have not earned any royalty revenue from product sales.

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on our behalf. In recording service fees, we estimate the time period over which the related services will be performed and compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust our accrual or deferred advance payment accordingly. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical study and clinical trial accruals.

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employeeâs requisite service period (generally the vesting period). Stock option awards granted to our nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. We use the Black-Scholes option-pricing model to estimate the fair value of our stock-based awards and use the straight-line (single-option) method for expense attribution. We estimate forfeitures and recognize expense only for those shares expected to vest.

We account for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of our common stock.

We recorded noncash stock-based compensation for employee and nonemployee stock option grants and ESPP stock purchase rights of $1.3 million and $0.9 million for the three months ended September 30, 2013 and 2012, respectively and $3.3 million and $2.7 million for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, we had outstanding options to purchase 4,924,864 shares of our common stock and had $8.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options and $0.2 million related to ESPP stock purchase rights that will be recognized over weighted-average periods of 2.4 and 0.6 years, respectively. There were 42,934 and 95,373 common shares purchased under the ESPP for the three and nine months ended September 30, 2013, respectively. We expect to continue to grant stock options and ESPP stock purchase rights in the future, which will increase our stock-based compensation expense in future periods. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Recent Accounting Pronouncements

In February 2013, a new accounting standard was issued that amended existing guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The new standard requires the disclosure of significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The standard is effective prospectively for interim and annual periods beginning after December 15, 2012. We adopted this guidance as of January 1, 2013 and its adoption did not have an effect on our financial statements.

In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are in the process of evaluating the impact of the new standard on the condensed financial statements.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

Comparison of the Three Months Ended September 30, 2013 and 2012

Contract revenue. For the three months ended September 30, 2013, we recognized $1.7 million for research services performed under the Gates Foundation agreement, $0.1 million of which related to an aggregate of $0.8 million of reimbursements for services performed prior to the effective date of the agreement. We also recognized $0.8 million for research funding and $0.2 million of the $3.5 million upfront fee received under our collaboration with Lilly, $0.4 million for research funding under our collaboration agreement with GSK and $0.5 million for research work performed under our agreements with not-for-profit organizations for neglected diseases. For the three months ended September 30, 2012, we recognized $0.9 million for research funding and $0.2 million of the $3.5 million upfront fee received under our collaboration agreement with Lilly, $0.3 million of the $7.0 million upfront fee received under the Medicis Agreement and $0.3 million for research funding under our collaboration agreement with GSK. We also recognized $0.8 million for research work performed under other research and development agreements, including our agreements with not-for-profit organizations for neglected diseases. We expect to recognize the remaining $4.8 million of the $7.0 million upfront fee received under the Medicis Agreement in the fourth quarter of 2013 as a consequence of the termination of that agreement.

Research and development expenses. Research and development expenses consist primarily of costs associated with research activities, as well as costs associated with our product development efforts, including preclinical studies and clinical trials. Research and development expenses, including those paid to third parties, are recognized as incurred. Research and development expenses include:

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external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, contract research organizations and investigational sites;

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facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or depreciation of leasehold improvements and equipment, laboratory supplies and other expenses.

Research and development expenses decreased by $1.1 million for the three months ended September 30, 2013 as compared to the same period in the prior year. Although expenses for our tavaborole program decreased by $4.5 million, this decrease was partially offset by increases of $2.7 million and $1.6 million, respectively, in our AN2728 program and under our new research agreement with the Gates Foundation. As our tavaborole Phase 3 and cardiac safety clinical trials were completed in 2013, our third quarter 2013 costs for this program were lower than they were for the same period in 2012 when we were actively conducting two fully-enrolled Phase 3 trials, the cardiac safety trial and the repeat insult patch test (RIPT) study. Our NDA for tavaborole was filed in July 2013 and our consulting costs and internal efforts were lower in the third quarter of 2013 as compared to the third quarter of 2012, when we were actively involved in preparation for this filing. In addition, in the third quarter of 2012, we were developing the processes to manufacture this product in commercial quantities and preparing registration batches, whereas our manufacturing activities have been more limited in the third quarter of 2013. Our total expenses for AN2728 were higher for the third quarter of 2013 compared to the same period in 2012, primarily from increases in costs related to clinical trials, consulting and internal efforts for the current period, partially offset by lower costs for manufacturing activities and preclinical studies. In the third quarter of 2013, we were actively enrolling patients in our Phase 1 absorption trial and cardiac safety trial, performing initial manufacturing and regulatory activities in preparation for our Phase 3 clinical trials and performing long-term preclinical studies. During the third quarter of 2012, our AN2728-related activities were less extensive and included initiation of two less costly Phase 2 trials in adolescents, manufacturing and labeling of supplies for both the Phase 2 trials and our preclinical studies and conducting long-term preclinical studies.

Due to our disputes and related legal proceedings with Medicis, we suspended our research and development efforts for this collaboration in 2013 and, as a result, we had no Medicis-related research expenses in the third quarter of 2013 compared to $0.2 million in the same period in 2012. For the third quarter of 2013, there was a $0.7 million decrease in our research and development spending for our Lilly collaboration and for other research activities, including our neglected diseases programs, when compared to the same period in 2012. Our Lilly collaboration spending declined versus the same quarter in 2012 as decreases in expenses for domestic animal indications outweighed our increased spending on food animal indications. Expenses for other research activities, including neglected diseases programs, decreased mainly due to lower expenses for filarial worm, malaria and early-stage research than were incurred in the same quarter last year.

We expect our quarterly research and development expenses for the remainder of 2013 to be comparable to those for the third quarter of 2013, as the decline in clinical trial costs due to the completion of our Phase 3 trials for tavaborole is expected to be offset by increased development and clinical costs for AN2728, increased spending under our new research agreements with the Gates Foundation and DTRA and continued spending for our Lilly collaboration and our neglected diseases initiatives. We expect no further Medicis-related research expenditures as a consequence of the termination of that agreement.

General and administrative expenses. General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation and travel expenses, for personnel in our executive, finance, business development and other administrative functions and professional fees for legal services, including patent-related services, and auditing and tax services. Other general and administrative expenses include facility-related costs not otherwise included in research and development expenses and consulting fees associated with financial, business development and marketing-related services.

The increase in general and administrative expenses of $4.1million in the third quarter of 2013 compared to the same period in 2012 was primarily due to an increase in legal fees, which resulted from the legal proceedings for our disputes with Valeant and Medicis, and marketing activities for tavaborole.

We expect that general and administrative expenses will decrease in the future due to reduced legal fees related to our disputes with Valeant and Medicis. However, depending on the decisions we make regarding the manner in which tavaborole is to be commercialized, these decreases may be outweighed by increased expenses for sales and marketing activities and the hiring of additional staff to support our commercialization efforts.

Interest income. Interest income for the third quarter of 2013 was comparable to the same period in 2012.

Interest expense. Interest expense increased for the three months ending September 30, 2013 compared to the same period in 2012 due to the higher outstanding balance of our debt.

Other expense. The increase in other expense in the third quarter of 2013 compared to the same period in 2012 was a result of higher deferred financing fees amortization related to our expanded debt facility.

CONF CALL

DeDe Sheel - Investor Relations
Thank you. Good afternoon and thank you for joining us for Anacorâs third quarter 2013 financial results conference call. Joining me on todayâs call are David Perry, our CEO and Geoff Parker, our CFO who will review our business, clinical and financial highlights for the quarter ended September 30, 2013.

Before we get started, I would like to note that during our call and question-and-answer session today, we will be making certain forward-looking statements, including statements regarding our milestones, clinical plans and financial projections. Our actual results may differ materially from those indicated in these forward-looking statements due to risks and uncertainties, including the timing of data from our safety studies and the initiation of a Phase 3 study for AN2728, risks related to patient accrual and execution on clinical plans, the timing for potential approval of tavaborole by the FDA, the potential for success of tavaborole and our AN2728 compound, financial projections related to our cash balance and use of cash, as well as our ability to fund operations through the initial launch of tavaborole and receipt of AN2728 Phase 3 data and other matters that are described more fully in Anacorâs Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC and subsequent quarterly reports filed on Form 10-Q.

Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this call and we undertake no obligation to update any forward-looking statements made on this call today, except as required by law.

And now, I will turn the call over to David Perry.

David Perry - Chief Executive Officer
Thank you, DeDe and thanks everybody for joining. Q3 was an eventful one for us starting with our most advanced drug tavaborole. As we announced earlier this year, in July we submitted our new drug application for tavaborole to the Food and Drug Administration and in October the NDA was accepted for filing by the FDA with a PDUFA date of July 29, 2014. Subject to FDA approval, we expect to launch tavaborole in the second half of next year.

Moving on to arbitration, on October 27, we entered into a settlement agreement with Valeant Pharmaceuticals, in which Valeant agreed to pay us $142.5 million to settle all existing and future claims related to our arbitration with Valeant and Dow Pharmaceutical Sciences and our dispute with Medicis. We received payment from that settlement earlier today. With regard to commercialization, obviously the capital from the Valeant settlement provides us with a lot of flexibility as we continue to evaluate the commercial strategy for tavaborole. We continue to believe that this is primarily a specialty market and is one that can be successfully detailed with a sales force of 60 reps to 80 reps initially targeting podiatrists and dermatologists. And now that we have the capital finance such a launch on our own if we choose to do so.